Why blend in when your portfolio was made to stand out

Traditionally, emerging market debt has delivered superior risk-adjusted returns to investors. The challenge for investors is that the asset class is a complex and varied cocktail: hard-currency, local-currency, sovereign, quasi-sovereign and corporate debt. So, what’s the right mix? It’s little wonder that many investors find it challenging to choose the right products and combine them in an efficient manner.

The Vontobel Fund - Emerging Markets Blend addresses this particular need by giving investors access to the full opportunity set from the main building blocks of emerging markets fixed income and currencies. The Fund delivers a “best ideas and allocation” solution, with the goal of generating high income on a total-return basis.

Launched and tested since August 2015, the Fund exploits value-driven and event-driven inefficiencies across emerging hard-currency sovereign debt, local-currency debt, and corporate hard-currency bonds. Over the last three years, it has returned 12.8% p.a. on a net-of-fees basis for the institutional share class, outperforming its reference index by over 7% p.a.

The recent headwinds weighing on emerging markets have led to attractive valuations. While we expect relatively high levels of volatility to continue, we also welcome this environment as it creates opportunities for active managers like us to deliver alpha for our investors. So, how do we do it?

How we create alpha in various market phases markets:

We take a deeply contrarian approach to emerging market debt, aiming to take advantage of the dislocation in valuations that often present themselves in this inefficient and news-flow driven asset class. While at times our drawdowns can be higher, we have certain typical traits we adhere to, depending on what type of phase the market is experiencing:

Typical behavior during consolidating markets:

• During significant widening of spreads (e.g. panic and blood on the walls), mispricings present themselves and we tend to reinforce our exposure as bonds are easier to buy.
• We accept that reinforcing right at the bottom is almost impossible.
• We may underperform in periods of a deep correction as we add risk, but when markets stabilize and rebound, the portfolio performance tends to accelerate.

Typical behavior during rallying markets:

• Invariably, mispricings continue to exist across regions, countries, curves, currencies, etc.
• We tend to be overweight to capture these mispricings

Typical behavior in overheating markets:

• When we sense that the “dash for trash” is exaggerated, and investors are gobbling up anything they can get their hands on, we tend to take profits, reduce exposure to spread duration, increase average rating, etc.
• We find at these times it is easier to unload bonds.

Why choose a blended approach to emerging market debt

With our active and high-conviction investment style, we pick the best of the bunch from our emerging market hard-currency, local-currency and corporate strategies to provide investors with an optimal blend of emerging market debt in one single fund. To date, our approach has delivered to investors what we have promised: Since inception, our Blend Fund has outperformed its reference index, returning nearly 13% p.a. on a net-of-fees basis for the institutional share class (see charts 1 and 2).

The Vontobel Fund - Emerging Markets Blend offers a solution to investors who want to profit from the carry and superior risk-adjusted returns on offer in this asset class, but don’t want to navigate the challenges of allocation between the different sectors in emerging markets. So, if you want your portfolio to stand out, why not try blending into emerging market debt.